- University research has been under-priced and this has led to significant under-investment in research infrastructure.
- Since September 2005, it became mandatory for all Research Council applications to be done on a fEC basis.
- Other Government Departments are required to fund research projects at 100% fEC.
- Institutions need to ensure that commercial sponsors are, where appropriate, charged a market-based price above fEC.
- fEC is to be calculated using an extension of the TRAC (Transparent Approach to Costing) methodology.
- A quality assurance process must be satisfied before fEC rates will be acceptable to Research Councils.
- The process relies on academic staff to provide accurate information for both annual TRAC time allocation and project costing.
The Government’s 1998 Spending Review granted additional funds for higher education, but required more detailed information about what Universities were spending their money on. A Transparency Review was undertaken and in 1999 this led to the introduction of the Transparent Approach to Costing (TRAC) methodology, and a requirement for the University to submit a Transparency Review return to the Funding Council (Hefce) annually (note 1).
In addition to the Transparency Review, a number of separate studies were undertaken to assess the condition of Research Infrastructure in the UK.
The outcome of the Transparency Review was that the UK HE sector showed substantial losses for publicly funded research. Non-publicly funded research was also shown to be in deficit, suggesting that commercial research was also being under-priced. In addition, the infrastructure studies showed that there were significant problems of under-investment in research buildings, facilities and equipment in all Universities.
The Government broadly accepted the conclusions and following the Spending Review, in July 2002 the Government published its report ‘Investing in Innovation’, which declared that it would:
- Establish a substantial and dedicated stream of capital for Universities worth £500 million per year by 2004-05, to develop their science research infrastructure (SRIF 2)
- provide substantial new resources to Research Councils from 2005-06 to enable them to make a more realistic contribution to the full costs of the research they sponsor in UK Universities.
Next Steps
As a consequence of the above, it was agreed that all Universities should begin costing research projects on the basis of full Economic Cost (fEC). Institutions would need to ensure that efforts were made to recover the fEC where possible, although not all sponsors will pay the full cost. Some sponsors have already indicated their position:
From September 2005, all applications for grants to Research Councils must be on the basis of full Economic Cost (fEC). The dual support system will continue so Research Councils will only fund a proportion of fEC (now confirmed to be 80%). The balance is assumed to be funded through the QR resource.
Government departments (excluding the NHS) should begin to fund 100% of fEC.
Commercial sponsors should pay prices for research based on market rates, and whenever possible, these prices should be at a level higher than fEC. If the publicly funded research element of HE work is to be funded at a level at or near 100% fEC, it is imperative that Universities also persuade commercial sponsors to pay improved prices, otherwise the additional funding obtained from the government will effectively be used to subsidise non-publicly funded research.
How is fEC calculated?
Institutions should calculate fEC on a transparent basis using an extension of the TRAC methodology already being used to analyse the five figures at Institutional level. The academic time allocation data will continue to be collected and it is envisaged that the data will be collected more frequently and from a wider sample of staff to make it more reliable. Further guidelines have been issued to the sector to ensure a consistent approach is applied to calculating fEC in all Institutions. To this end, a new quality assurance process has been established by Hefce and this must be satisfied before fEC rates are acceptable to the Research Councils. A benchmarking exercise will also be carried out to compare fEC rates between Institutions.
Academic Staff
The time of all academic staff involved on a project should be estimated and included on costing schedules. The time should include all time required to manage and deliver the project. It should be an accurate estimate of the actual time staff are likely to be working on the project.
A salary cost should then be applied to this time. In applying an academic’s salary cost, Institutions are required to calculate a ‘standard’ working year. This is defined as a calendar year excluding weekends, statutory/institutional holidays, and holiday entitlement. The standard working year will not vary between academic staff, regardless of whether a particular academic works more or less hours during a week than the standard. A default calculation is given based on 7.5 hours a day and 220 days a year. The academic’s salary cost including superannuation and NI should be divided by the standard year to arrive at a £ rate per hour/day/week/month. If we were to use a varying number of hours per day or days per year then we run the risk of undervaluing academic time , and costing on a different basis to other institutions.
Technical and Clerical Staff
Where support staff work closely with academic staff or in support of their activities and equipment, their salary costs should be directly charged to projects. These costs will need to be estimated as accurately as possible.
Specialist facilities
If budget centres have facilities (e.g., some large specialist equipment) then the cost of these activities should be directly allocated to projects, if the budget centre considers it appropriate (e.g., if the cost is material, the usage is sufficient to be able to recover full costs over the year, and we can illustrate that the usage is efficient). Where such facilities are charged directly, their costs can no longer be part of the indirect cost recovery.
Estates Costs
A charge should be made to all projects for the cost of the space the project will use. It is envisaged that three types of estates cost rates will be calculated (general, laboratory and clinical) and the relevant rate will be applied as appropriate.
The Estates cost will be charged to projects on the basis of £ per academic staff FTE (full time equivalent) initially.
Indirect Costs
Indirect costs include budget centre overhead costs and corporate services costs. These costs should be allocated to research, teaching and other activities on the basis of TRAC cost drivers. Indirect costs for research should then be allocated to projects on the basis of £ per academic staff FTE. This is a change from current practice where a % on staff costs is applied.
Note 1
Using TRAC methodology, every University in the UK was required to report its total costs as split into five figures:
Publicly Funded Teaching
Non-Publicly Funded Teaching
Publicly Funded Research
Non-Publicly Funded Research
Other activities
Detailed guidelines were issued to the sector to ensure a consistent approach was adopted to arrive at the figures. Key to the TRAC methodology was the use of time allocation data from academic staff, to inform how staff and other costs were to be split between the five categories. Other surveys were carried out at HEIs to allocate other costs in a fair and reasonable manner, in line with TRAC requirements.
The five calculated costs must reconcile back to the University’s total costs for the year as reported in the annual accounts, with the exception of two adjustments:
Infrastructure Adjustment to restate buildings depreciation on a current cost basis
Cost of capital adjustment added to reflect the financing costs of the institution and need for rationalisation and development of business capacity.
This exercise is now carried out on an annual basis with returns sent to HEFCE in January each year.